Push to allow subsidies for nannies as childcare means test in frame

The nation's childcare system faces a significant shake-up, with a draft Productivity Commission report suggesting families be able to access one simplified, means-tested payment that would cover the use of nannies.

The report - to be delivered to the Abbott government this month - argues that the present system means some secondary earners, most of whom are women, face extremely high effective marginal tax rates from paid work.

The Productivity Commission proposals would mean the end of non-means-tested government assistance for the costs of childcare.

The Australian can reveal the report backs a nanny scheme, allowing families who do not work traditional hours to receive childcare at home around the clock. The report calls for a simple program that allows quality and safety but doesn't go beyond that.

Some groups have argued subsidies should be available only for nannies if they have early education qualifications.

The Australian understands the Productivity Commission believes this is too extreme.

The government asked the Productivity Commission to undertake a public inquiry into options for childcare and early childhood learning, with a focus on developing a system that supported workforce participation and addressed children's learning and development needs.

The proposal for a means test will be the most controversial. Under the proposal, a simplified payment would stop at a certain percentage of the cost of childcare and be whittled down to nothing for families on very high incomes.

The present childcare rebate is not means-tested and provides parents with 50 per cent of their childcare costs up to a total of $7500 a year for each child.

The Australian understands the commission wants to simplify the childcare payment stream to target it to families where it would generate the biggest public return for the taxpayer money spent. It believes payments are going to high-income families that would be participating in the workforce regardless of the rebate.

Business groups have opposed means-testing, with the only group to back it being the Australian Chamber of Commerce and Industry.

The trade union movement has broken ranks with Bill Shorten's Labor opposition and is pushing the Productivity Commission to means-test the childcare rebate, arguing that the money given to high-income families above $150,000 a year should be redirected to poorer families.

Both the peak national trade union, the ACTU, and Unions NSW are arguing for means-testing, with the latter saying the phasing out of the payment should start at $150,000 of household income.

Taxpayers spent $6.5 billion last financial year on subsidies and rebates for childcare, rising to $7.6bn in 2016-17.

Across the next four years, spending will total $28bn.

Childcare spending will nearly triple in a decade as more working parents demand daycare and wage costs soar, the federal Education Department recently warned.

Parents' out-of-pocket costs will double as a proportion of household income during the next six years, the department reveals in new modelling for the Productivity Commission's childcare inquiry. The analysis shows that high childcare fees discourage parents from working more than three days a week.

The Productivity Commission also argues that before and after-school-hours care should not be subjected to the requirement in the national quality framework for qualified educators to be included in all childcare settings.

The report is understood to back strongly 15 hours a week of preschool for four-year-olds, a proposal that would require increased government funding. The federal government has not funded its component of the preschool funding agreement with the states beyond its conclusion in December, prompting the states to claim they will reduce the number of hours of preschool they fund.

The report says the centre-based childcare system is most beneficial for children who are disadvantaged, and urges that the system needing to target "at risk" children who benefit enormously from formal long daycare.

The report will also discuss the new paid parental leave scheme - capped now at $100,000 per mother for six months of leave. It is understood to discuss how the money that will be generated from taxing big business for the scheme could be spent, including on childcare.

The National Quality Framework is broadly supported by the Productivity Commission, but the report will analyse where it has gone too far.